On the Design of Optimal Grandfathering Schemes for Emission Allowances

17 Pages Posted: 10 Sep 2003

See all articles by Christoph Böhringer

Christoph Böhringer

University of Oldenburg - Economic Policy; Centre for European Economic Research (ZEW)

Andreas Lange

University of Hamburg

Date Written: 2003

Abstract

To meet its commitment under the Kyoto Protocol, the EU plans to implement an emissions trading system with grandfathering of allowances. Besides having distributional impacts, the choice of the grandfathering scheme may affect efficiency if firms anticipate how future allocations depend on upcoming decisions. In this paper, we determine central design rules for optimal grandfathering within a simple two-period model. We find that for (small) open trading systems, where allowance prices are exogenous, first-best second-period grandfathering schemes must not depend on firm-specific decisions in the first period. Second-best schemes correspond to a Ramsey rule of optimal tax differentiation and are generally based on both previous emissions and output. However, for closed emissions trading systems, i.e. endogeneous allowance prices, firstand second-best rules coincide and must not depend on previous output levels. They consist of an assignment proportional to the emissions in the first period plus a term which does not depend on firm-specific decisions in either of the two periods.

Keywords: Emissions trading, grandfathering, efficiency

JEL Classification: Q28

Suggested Citation

Bohringer, Christoph and Lange, Andreas, On the Design of Optimal Grandfathering Schemes for Emission Allowances (2003). ZEW Discussion Paper No. 03-08, Available at SSRN: https://ssrn.com/abstract=412463 or http://dx.doi.org/10.2139/ssrn.412463

Christoph Bohringer (Contact Author)

University of Oldenburg - Economic Policy ( email )

Centre for European Economic Research (ZEW) ( email )

D-68161 Mannheim
Germany
+49 6211235200 (Phone)
+49 6211235226 (Fax)

Andreas Lange

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146
Germany

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